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June 2, 2009

Two Birds, One Stone

By James Ramage

For brokers, building a cross-asset trading infrastructure is no walk in the park. Most firms have structured their systems and strategies along single asset classes.

This has meant that each desk would only see its specific leg of a cross-asset trade, said Aite's Lee. And while a limited perspective hasn't necessarily been a bad thing, it has meant that neither side would have a full picture of a trade.

Brokers also must ensure that their equities, futures and options infrastructures are well integrated, industry experts said, and not calcified into segregated silos. Also, enabling simultaneous access for algos across asset classes to appropriate venues presents large challenges for brokerages, he added.

"You need to have connectivity to all the execution venues," Lee said. "And you need to have connectivity that incorporates the unique functions that each execution venue exhibits-things like special order types."

Into the Futures ... Market

Firms also need enormous scale to do cross-asset trading, he said, particularly for a program order that sprays, say, 200 names across 10 venues.

UBS will unveil two types of algorithms-one for single-stock trades and another for portfolio trades. Both types are expected to be released in the third quarter.

UBS can build cross-asset algos because it is electronically plugged in to the necessary markets-the cash markets' displayed and non-displayed venues, as well as the futures, options and ETF markets, Owain Self said. A cross-asset strategy will use UBS's algorithmic trading engine to send high-speed orders to the best venues-trading both asset-type legs.

A common scenario for using UBS's algorithm would be a pairs strategy, with a single-stock order on one leg and an index futures contract on the other. The cross-asset algorithm can pair a single cash equity with anything UBS's execution platform can trade, including an ETF, a single-stock futures contract or an options contract. 

Owain Self, UBS

The objective and capabilities on the program side are the same as those on the single-stock, Self said. The algo helps users, for example, who want to liquidate a hedged portfolio remove the hedge in the same ratio, he added.

In such a strategy, the algo ensures users aren't restricted to using a very schedule-based algo, such as VWAP, but can instead use any single-share algo, Self said.

"As soon as the executions are happening, the algo starts working both sides in sync," he said. "So it's taking the hedge off in relation to the cash component."

The next stage for UBS algos, according to Self, is to offer the same functionality when trading multiple futures contracts.

Goldman Sachs introduced enhancements to its options algorithms recently that let its customers auto-hedge their positions in the options market. This allows options traders to simultaneously execute an equity hedge in real time as an options order is filled.